Gap is trapped in a 'game of chicken' with American customers

The apparel company has reported yet another quarter of dismal
results for both the parent company and its subsidiaries Banana
Republic and Old Navy.

For the first quarter of fiscal 2016, Gap Inc.'s comparable sales
were down 5%, compared with a 4% drop in the first quarter of
2015.

Gap Inc. CEO Art Peck said the company had continued to resort to
heavy promotion — to get people into stores and also to rid
itself of inventory and fashion misfires.

"If we just think about promotion, I think it depends on
the brand, because we're in very different positions on each
brand," Peck said Thursday in an earnings call.

Now the company is seeing the downside as it tries to wean its
customers off of the heavy discounting and promotions.

"Same is really true on Banana, where we have backed off"
on promotions, Peck said, adding (emphasis ours): "And I
will be the first to say that when you start tightening up in
promotion, you are playing a game of chicken with your
customers ...And so we've been playing
that now for really the last quarter. And we've seen more effects
on this quite honestly."

Chicken is a game in which two drivers speed toward each
other to see who can go the longest without veering away to avoid
a collision. Ultimately, it spells disaster.

"It will be easier in Gap, where we're seeing the numbers
move more consistently in the right direction, a little more
sporadic inside of Banana," Peck said.

When we visited Banana Republic in February,
we saw that lots of the clothes were on sale; in fact, in the
Flatiron location near Business Insider's headquarters, there was
nearly an entire room dedicated to discounted apparel. Some of
the clothes relegated to the sale section seemed better suited
for a Forever 21 than a store that is supposed to be selling
"updated classics with a twist," as Peck put itlast fall.

But most important, promotions ran rampant even for in-season
clothing. It prompts the question: Why bother to ever pay full
price at Banana Republic?

And even though things looked better at Gap's namesake store, the
brand is still resorting to very heavy discounts. In fact, in
early April, the company had a promotion sign outside its
Flatiron store, as if a sale were the only way it could get
customers to come inside.

Mallory Schlossberg/Business
Insider

It's indicative of a trend that is troubling for the retail
industry; many other stores, including J. Crew and Nordstrom, have also resorted to
heavy promotions and discounts. And sometimes even promotions
aren't enough to win over customers, as in Nordstrom's case.

"Everyone finds themselves in a tough
environment, and they're doing what they can to stimulate sales,"
Nordstrom's president of merchandising, Peter Nordstrom, said on
the company's earnings call last week. "And I think it just
depends on your customer. For some, I guess that means price
promotion is a lever that's going to really compel their
customers. I think what you're hearing from us is that's not the
most compelling lever for our customers. So what can we do about
that?"

One bright spot in Gap Inc.'s business remains
Athleta, the company's Lululemon competitor. The company doesn't
disclose much information on it yet, but judging by Peck's
comments, it appears to be doing well.

"So included in the other column is Piperlime, Intermix,
and Athleta," Peck said. "And Piperlime, we wound down in Q1 of
last year, so the number looks a little bit funny because of the
lack of Piperlime sales this year when we had them last year. If
you remove that, we'd have a double-digit increase in other, and
that gives you a sense directionally since Athleta is much larger
than Intermix. That gives you a sense directionally of that
business."

Also on its earnings call, the company highlighted some
strategies to fix its business. It will be closing up to 75
stores, though most of these closings will not be in the
US.